You might be wondering why the stock market is doing so well during a time when so many people are struggling? After all, the month of October 2011 results saw the market go up by more than 1000 points and that means people are still buying stocks. The Dow had one of it’s best months in years as you can see by the chart below:
Yet everywhere you turn it seems, there is bad financial news here in America and around the world. We have the Occupy protests gaining momentum, continued high unemployment, housing foreclosures problems, consumer confidence down, and an almost all time high belief that our country is headed in the wrong direction. I mean, it is really bad out there and yet stocks continue to do well. What is happening here?
The stock market does well when companies make profits and right now, they are still doing that. Basically, that is why the market’s performance hasn’t mirrored the dire economic news all around us. How can companies be doing well when so many of us are not?
One way is by cutting costs.
New and improved technology is moving at breakneck speeds and has been for much of this new 21st century. Many of the jobs people used to do can be done by computers and machines. One only has to look at this article about Foxconn which is one of the companies in China that makes Apple’s products.
They are attempting to phase out as many as one million workers and replace them with robots. Would that ultimately save them a lot of money? You bet. Would it be bad for those displaced Chinese workers. Of course. But if it ever happens, undoubtedly switching from people to robots would save Foxconn millions and maybe billions of dollars.
We just can’t escape the advancement of technology and people are more expensive to employ than computers. Every company is trying to cut costs and do things better which means the days of labor intensive industries are leaving us. In many cases that means replacing work done with humans and switching over to computers.
It is happening right now all across the world and it is one of the things that is contributing to higher unemployment. But reducing the human workforce is translating into savings and higher profits for companies and that is why many are still doing well even though our economy as a whole is not. More people may be out of work but that isn’t hurting company profits as they are saving money with cheaper technology.
Another reason why companies are doing relatively well while the rest of us aren’t is because they are shipping work overseas where it is less expensive. That same Chinese company Foxconn can make things much cheaper than American workers over here. This is because they don’t have all the restrictions put on American companies by our government.
Companies doing business in the U.S. now have to jump through so many hoops that it is just easier to get their stuff made overseas. Obama-care is costing them more as well as all the “green” requirements that any company has to comply with who wants to set up shop here in America.
It has been well documented that our businesses in America are at a competitive disadvantage to companies in other countries that don’t have those same government impediments blocking their way. This has been happening for years, of course, but it seems the situation is continually getting worse.
Doing business overseas and making products there is saving U.S. companies lots of money. Saving money equals more profits and thus we still have a lot of big businesses doing well which translates to a stock market that is doing well as well.
But the question is, how long can this last?
Eventually the awful economy and everything that goes along with it will catch up and start eating into company profits. Cost cutting can only go so far: if people don’t have money to spend they can’t buy anything and you have to have buying to have profits.
This is the part that scares me the most about the stock market. It might be doing alright today but with all the financial troubles that are out there in the world, I fear the next 2 to 5 years might be much worse. Everything is so interconnected now that nothing is immune from bad news for long.